The Looming Debate Over Tax Increases

Above health care and climate change and financial regulation, a larger debate casts its dark shadow: Taxes. President Obama says he's serious about closing the deficit. He has also said, both on the campaign trail and in office, that he has no plans to raise taxes on anybody making under $250,000 a year. Can both things be true? David Wessel, economics editor of the Wall Street Journal, said flatly: No.

Wessel:

"If we relied only on people that made above $250,000 a year, we would have to raise their taxes from about 30 percent of their taxable income today, to about 70 percent of their taxable income, on average. [President Obama is] almost certainly going to have to raise taxes on rich people, on the rest of us, and cut spending. That's the simple arithmetic."

So taxes are going to have to go up. Not just for the top one percent, or the top quintile, but on many millions more Americans. And a number of politicians, commentators, and policy experts agree. But take a look at Obama's 2010 budget and its anticipated impact on tax rates in his election year:

For reference, "Current Law" (the red bar) assumes the Bush tax cuts expires and the AMT extends beyond the patch across the 80th through 95 percentiles. The "Admin Baseline" (the blueish middle bar) assumes an extension of: (1) The Bush tax cuts into 2012, (2) the AMT patch and (3) 2009 estate tax law. Against that baseline, Obama's 2010 budget would cut effective tax rates from the lowest quintile to the 95th percentile. Here's what the picture looks like when you zoom in on the richest 20 percent:

What does it all mean? The Obama budget results in a significantly more progressive tax system, but both the Admin Baseline and the 2010 budget reduce overall effective tax rates to 20.7 percent from 23.4 percent. Designing tax rates coming out of a recession is a tricky thing. You don't want to stifle recovery with over-taxation, but Obama also needs money -- that is, taxpayer cash rather than Asian loans -- to pay down our trillion dollar deficits and fat budgets. The battle over how to extend the Bush tax cuts might not get the same multi-month marquee treatment from the press, but from a dollar standpoint, it's even more significant. As TaxVox's Howard Gleckman writes:

It is interesting, and perhaps worth noting, that while political opposition seems to be hardening against the $1 trillion, ten-year cost of the early versions of health reform, barely a peep of concern has been raised about the $3 trillion price tag for President Obama's plan to extend most of the Bush-era tax cuts.